AUDJPY Pullback Setup (July 04, 2016)

AUDJPY recently broke below a long-term support area in its sharp dive to a low of 72.40 before pulling back up. Applying the Fib tool on the latest swing high and low shows that this former support level lines up with the 61.8% Fibonacci retracement level, which might now hold as resistance.

If so, AUDJPY could resume its drop to the swing low or even create new lows. At the moment, price is stalling at the 50% Fibonacci retracement level near the other week’s lows. This is also close to the 100 SMA, which might hold as dynamic resistance.

Speaking of moving averages, the 100 SMA is below the 200 SMA so the path of least resistance is to the downside. Stochastic has been indicating overbought conditions for quite some time, which means that bearish pressure is building up. Once the oscillator turns down from the overbought area, selling momentum could be seen.

Event risks for this trade this week are the top-tier releases from Australia and the RBA interest rate decision. Australia will print its retail sales and trade balance report tomorrow, with the former expected to show a 0.3% increase in consumer spending and the latter expected to show a wider deficit of 1.72 billion AUD.

The RBA statement could have a stronger impact on Aussie price action as many are expecting the central bank to cut interest rates again, possibly to shield the economy from Brexit repercussions this time around. However, a decision to stay on hold could mean a relief rally for the Aussie.

Earlier today, the Australian building approvals report showed a 5.2% slump, worse than the expected 3.6% decline. There are no major reports lined up from Japan today but BOJ Governor Kuroda has a speech scheduled on Thursday and medium-tier reports such as the current account balance and average cash earnings data are due on Friday.